Social Security Testimony Before Congress

Statement by Kenneth S. Apfel,
Commissioner of Social Security
before the Senate Committee on Budget
Taskforce on Social Security

February 24, 1998

Mr. Chairman and Members of the Task Force on Social Security:

Thank you for inviting me here today to participate in the
discussion of the future of Social Security.

Three weeks ago, for the first time in 30 years,
President Clinton submitted to the Congress a balanced budget.
The President's fiscal year 1999 budget maintains fiscal
discipline while investing in the critical needs of the American
people. In a historic shift, this budget delivers surpluses over
the next 10 years--$1.1 trillion--and, faced with the prospect of
a sizable surplus accruing, the President has called on Congress
to reserve 100 percent of the surplus until all necessary
measures have been taken to strengthen the Social Security
program for the 21st century.

I would like to begin today by discussing why Social Security is
so important today, in the past, and for the future; the reasons
why the program must change; and the process the President has
outlined to determine t hose changes.

Why Is Social Security Important

For over six decades, Social Security has been there for
Americans. Since it began paying benefits in 1940, the Social
Security program has provided security for retired workers, as
well as their families and survivors, and later for disabled
workers and their families. Today Social Security provides
benefits to more than 43 million workers and family members, and
about 95 percent of the population participates in Social
Security through work and their contributions to the system.

While Social Security provides retirement benefits for all who
are covered, it is important to note that it is the nation's
greatest anti-poverty program. Social Security benefits help
assure retirees that they will not be dependent on their children
or society for retirement income. Without Social Security, about
50 percent of those beneficiaries over 65 would be living in
poverty. Social Security benefits are the maj or source of income
for two-thirds of aged beneficiaries and the only source of
income for 16 percent.

As I mentioned, Social Security is not just retirement benefits.
It is America's Family Protection Plan. It provides survivor and
disability benefits to partially replace a family's income lost
due to the disability or death of a worker. Over 30 percent of
Social Security beneficiaries are receiving disability and
survivor benefits, and those programs make up over 30 percent of
the benefits Social Security pays.

Disability and survivor benefits provide significant financial
protection: for example, the average benefit paid today to a
disabled worker with a spouse and children is about $1,2 00 per
month. For a family in which the worker has died, leaving a
widow with two children, the average monthly survivor benefit is
about $1,500. For these people, Social Security enables them to
live fuller and more independent lives.

Social Security Is Progressive

Even with regard to retirement benefits, many people still judge
the Social Security program from too narrow a perspective.
Social Security is not only a plan for retirement and the return
on investment is not the sale criterion against which it should
be assessed.

As a social insurance program, Social Security spreads the cost
of protection against the risk of lost income due to retirement,
death, or disability over the entire working population, with
more protection, per dollar earnings, for lower paid workers and
for workers with dependents. The benefit formula is progressive in that it is designed so that those most likely in need--the
lower-paid worker--receive benefits that replace a higher
proportion of preretirement earnings than do the benefits for
higher earners. The fact that lower earners get a higher rate of
return helps the program provide a foundation of protection for
all Americans.

Social Security benefits are related to the worker's average
lifetime earnings subject to the Social Security tax. In
general, the higher the earnings, the higher the monthly benefit.
Virtually all workers can expect positive rates of return from
Social Security, even after adjusting for inflation, regardless
of how we now choose resolve the shortfall expected in 2029 .

Reasons Change Is Needed

From its beginnings in the 1930s, Social Security has been
financed on a pay-as-you-go basis, with current costs met from
current revenues. Any funds not needed to pay current expenses
are invested in interest bearing U.S. Government securities,
which provide interest income to the Old Age and Survivors
Insurance and Disability Insurance Trust Funds.

As a result of the 1977 and 1983 legislation, Social Security
financing began to move away from pay-as-you-go financing in the
direction of partial advance funding. At the beginning of 1997,
the trust funds had a balance of $567 billion, and income was
expected to exceeded outgo by about $89 billion, resulting in a
balance of $656 billion at the beginning of 1998.

Some future milestones for the program are:

2012

OASDI expenditures will begin to exceed annual tax
revenues ; the program will need some of the annual
interest income to make benefit payments.

2019

Expenditures will begin to exceed annual total income,
including trust fund interest; the trust funds will
need to begin using their principal to make benefit
payments.

2029

Trust fund reserves are depleted; then-current income
will pay only about 75 percent of annual benefit out go.

2070

Then-current income would only cover about 70 percent
of annual benefit out go.

The cost of the program will increase in the future especially in
2010 -2030 as the baby boom generation reaches retirement age.
Another important reason for the increasing cost of the program
is that Americans are living longer, healthier lives. In 1940,
the average life expectancy at the age of 65 was about 12.5
years. Today it is 17.5 years. Today there are about 3S million
Americans over the age of 65; by 2030, that number will nearly
double.

This increase in older Americans, combined with a lower birth
rate will place great strain on our retirement system. While
currently there are 3.3 workers per beneficiary, in 2030, that
ratio will decline to 2 workers per beneficiary.

Process For Change

President Clinton' s commitment to strengthening and preserving
the Social Security program is clear, and I believe his call to
action presents an historic opportunity. While previous changes
to the system--and, indeed, its very beginning--have been forged
in times of crisis, today we are in the enviable position of
having the advantage of a good economy and time to prudently plan
to change the system. But we must not squander this opportunity.

As the President announced in his State of the Union message, we
should not committ the projected budget surpluses for any other
use until we strengthen the Social Security system. The
President 's message was imple and very clear : Save Social
Security first .

The next step is to engage in a major national dialogue.
President Clinton has called on the American Association of
Retired Persons and the Concord Coalition to jointly hold a
series of nonpartisan regional forums throughout the country on
Social Security. The President, Vice President, and members of
the Cabinet will participate in these forums, as well as events
organized by the Pew Charitable Trust.

The President is encouraging all Americans to attend a Social
Security conference or forum--or to organize or host one if
there aren't any planned nearby. We need the views of all
Americans on this issue.

By the end of this year, the President will host a bipartisan
White House conference on Social Security as a culmination of
these events. This conference will be followed by negotiations
with congressional leadership on how best to accomplish reform;
to achieve, as President Clinton has said, "a landmark for our
generation--a Social Security system that is strong in the 21st
century. "

Ways to Use the Surplus

As you know, the President's budget projects that the surplus
will be $9.5 billion in 1999, followed by projected surpluses of
$8.5 billion in 2000, $28.2 billion in 2001, $89.7 billion in
2002, and $82.8 billion in 2003.

With regard to the ultimate Social Security reform package, many
different proposals have been put forward about how these
projected budget surpluses--or some portion of them--could be
used to bolster the reform effort. For example, it has been
suggested that surpluses could be used to buy down the debt; that
the surplus could be transferred to the OASDI Trust Fund and
invested in government bonds or alternatively, the Trust Fund
could invest those surpluses in equities.

Others have proposed that the OASDI Trust Funds be allowed to use
existing balances to redeem government bonds equal in value to
the surplus and invest those funds in equities. Others have
proposed that the unified surplus be used to fund individual
accounts. The appropriate role of the surplus in the ultimate
reform process is clearly a question that deserves scrutiny.

Public Understanding Critical

Before having discussions about reform proposals, it is important
that Americans understand the Social Security program. What do I
believe Americans should understand about our Social Security
program? What i s it about this program that reduced to its
essentials makes it of such importance to the American
electorate?

I want all Americans to understand the economic facts about
Social Security. As I have already noted, beginning in 2019, the
trust funds will start declining and will be exhausted by 2029,
if no changes are made to the current program. After the trust funds are exhausted,
however, annual revenues will be able to pay three-quarters of current-law benefits.

I want all Americans to understand what Social Security has meant
to older Americans. The plight of older Americans used to be a
disgrace. Now, Social Security provides them with a solid
me a sure of economic security even if they outlive the actuarial
tables, and their savings. It also provides many of them, and
their children, the advantages that only living independently can
offer.

I want all Americans to know that Social Security is more than a
retirement program. I want younger people to know that not only
will Social Security be there for them in the future, it is there
for them NOW. How many people know that 1 out of every 3 Social
Security beneficiaries is not a retiree but a disabled worker, or
a member of his or her family, or a survivor of a worker who has
died? They need to know that.

I want all Americans to know that Social Security was never
intended to provide for all of a worker's retirement income
needs. Pensions and personal savings have always been and should
be part of a sound financial retirement plan.

I want all American s to understand that the changing demographics
o f the country are the primary driver of the need for change.
There is an unalterable dynamic at work: by 2030, there will be
nearly twice as many older Americans as there are today, putting
great strains on our retirement system.

Finally, I want all Americans to understand one important fact:
as attractive as any option for change might be, there are tradeoffs that must be accepted if we choose it. These are
complex issues, and the advantages and disaavantages of each will
have to be discussed and examined.

Preserving the Successes of the Program

As we begin this dialogue, we need to reflect on what features
have led to Social Security's success. The dialogue will most
certainly be about how to address the challenges facing Social
Security in the future, but it will also be about how we preserve
and protect the accomplishments of the program that has served
this nation so well for over sixty years.

First of all, Social Security is dependable. Social Security has
been there each and every month. Millions of Americans count on
the arrival of their Social Security benefit. Today, more than
90 percent of the elderly in this country receive Social
Security. Americans of all ages must be able to count
on Social Security in the future. We have an obligation to
provide a dependable source of income that Americans can use to
plan their financial future with confidence.

In addition, Social Security is efficient. Less than one penny
of every dollar collected is used for administering the Social
Security program. It is a program that is portable and it is a
program that provides benefits that are indexed to inflation.

Social Security is also the greatest anti-poverty program ever
created. Without Social Security, nearly 50 percent of today's
elderly would be living in poverty. Social Security doesn't make
people rich, but it gives Americans rightly deserved financial
independence. This financial protection, however, is not just
for the elderly. Social security also protects working families
through disability and survivors insurance.

Social Security ensures that all workers receive an equitable
benefit through a progressive benefit formula. It is a program
that is universal and fair. Proportionately larger benefits are
provided to lower income workers who will need it most.

Finally, Social Security is a public trust. Social Security
spreads the risk associated with disability, premature death, and
old age among the entire working population and provides a
guaranteed benefit that is adequate and fair.

As we begin this dialogue, we would do well to question whether
changes to the program preserve and protect these important
accomplishments: whether Social Security continues to be a
benefit people can count on; whether the elderly, disabled, and
survivors of workers are protected from financial hardship;
whether the program is efficient; whether the program is
universal and fair; and whether the program is maintained as a
basic public trust. The dialogue about how we ensure the
solvency of Social Security in the 21st century will
need to include these critically important questions.

Conclusion

There are tough choices ahead of us. The discussions we are
undertaking must address the critical foundations of the program
and define for us whether reforms continue to preserve and
protect these foundations. Moreover, members of my generation
need to address the question of whether we would unfairly burden
our children and grandchildren by not dealing with this issue
now.

In closing, Mr. Chairman, I believe that every American needs to
participate in the coming dialogue. We will need open and
knowledgeable discussions in "kitchen-table" terms about the wide
range of Social Security issues. Ultimately, our efforts will be
judged on whether we have protected and strengthened Social
Security for the 21st century.

I would like to thank the task force for its efforts to explore
ways to restore the long-term health of the Social Security
program. I look forward to working with you, members of the
task force, and other members of Congress as we begin our
national discussion.